Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month		Labor Cost($)			Employee Hours
	January		9,790			290
	February		7,300			330
	March		7,831			350
	April		8,440			260
	May		10,087			310
	June		8,790			240
	July		11,040			400
	August		7,800			220

Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor.
$fill in the blank 1

2. Using the high-low method, calculate the variable rate.
$fill in the blank 2 per employee hour

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $fill in the blank 3 + ($fill in the blank 4 × Employee hours)

Answer 1

1.

Fixed cost = Highest activity cost - Highest activity x Variable cost per hour

= 11,040- 400 x 18

= 11,040-7,200

= $3,840

2.

Highest activity cost = $11,040

Lowest activity cost = $7,800

Highest activity = 400

Lowest activity = 220

Variable cost per hour= (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (11,040-7,800)/(400-220)

= 3,240/180

= $18 per hour

3.

Total labor cost = $3,840 + (18 x Employee hours)

Kindly comment if you need further assistance.

Thanks‼!